Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2003:1:
Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis

Hans Byström ()

Abstract: The growing interest in management of credit risk and estimation ofdefault probabilities has given rise to a range of more or lesselaborate credit risk models. Hall and Miles (1990) suggests an approachof estimating failure probabilities based solely on stock market prices.The approach has the advantage of simplicity but relies on markete.ciency to hold. In this paper we suggest an extension to the Hall andMiles (1990) model using extreme value theory and apply the extendedmodel to the Swedish financial sector and to individual Swedish banks.The 15- year long sample in our study covers the period of the Swedishbanking crisis of the early 1990s. We find a close correspondencebetween changes in the estimated probabilities of failure and the actualcredit events occurring. Credit ratings from major credit ratingagencies, on the other hand, are shown to react much less and muchslower to credit quality changes.

Keywords: banking crisis; default; credit risk; extreme value theory; (follow links to similar papers)

JEL-Codes: C32; G14; G21; G33; (follow links to similar papers)

28 pages, March 11, 2003

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This paper is published as:
Byström, Hans, (2006), 'Estimating Default Probabilities Using Stock Prices: The Swedish Banking Sector During the 1990s Banking Crisis', European Journal of Finance, Vol. 12, No. 4, pages 303-312

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